A spirited defense of 401(k)s is in order in the wake of The Wall Street Journal’s feature on the supposed champions of the retirement savings vehicle who now lament what they started. It has critics once again second-guessing the retirement savings vehicle, and it should stop.
Pensions were unsustainable, period. Unless we were to adopt a Logan’s Run-style mass democide at age 60, they (and their inherent “guarantees”) weren’t gonna last. Pensions were a glorious but brief benefit in the annals of employment history, their brevity a natural consequence of paying someone not to work.
Case in point; a friend’s grandfather once we remarked he spent far longer in retirement than he ever did employed, and didn’t remember much about his time as a working stiff. It wasn’t a recent conversation, and took place in the 1980s.
Even Ted Benna, one of the mournful champions mentioned who’s referred to as the “father” of 401(k)s, said his experience with a defined benefit was less than stellar. The company he worked for in the early-1960s allowed workers to qualify for its pension program at age 30 for men and 35 for women (seriously). Quit, get fired or become incapacitated one day before the predetermined retirement age, and you got nothing. And the company did all it could to encourage people to leave before that date.
As for the aforementioned defense, Ramesh Ponnuru is the man to do it.
The conservative pundit with the American Enterprise Institute, an equally conservative Washington, D.C.-based think tank, wrote Thursday that criticism of 401(k)s is being viewed with a sort of reverse-recency bias.
“[It’s] once again being read against the background assumption that in the good old days we had a better retirement system based on traditional defined-benefit pensions,” Ponnuru argues.
He quotes the Journal, which notes “the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts,” the implication being that Americans are therefore dangerously unprepared for retirement.
“But there’s also a positive story to be told,” he counters. “Whatever problems the U.S. pension system has, they are smaller than they ever were before.”
Indeed, Ponnuru’s argument squares with a 2015 study that compared the 401k system in this country with those in other developed nations.
Individuals in 19 countries were asked by marketing research firm GfK how strongly they agreed or disagreed with the following statement: “I am confident that I will have enough money to live the life I want when I retire.”
It found that Americans were the most confident in their retirement expectations. China took second and surprisingly, some European countries with strong government pensions, such as France, were among those with the lowest levels of retirement confidence.
We understand comparing the 401(k)’s popularity with retirement systems isn’t a very accurate measure of success; we do so only to illustrate it could be worse, a point Ponnuru also makes.
“None of this means that 401(k)s couldn’t be better, or that public policy concerning retirement couldn’t improve,” he concludes. “But the improvements we should be considering would expand 401(k)-style plans to people who don’t have access to them. We could, for example, make it possible for small businesses to join together to offer their employees such plans. Our system, that is, has real strengths, and we should build on them rather than abandon it.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
